Bassett Furniture Industries, Incorporated (NASDAQ: BSET) fundamentals look pretty strong: Could the market be wrong about the stock?


It’s hard to get excited after looking at the recent performance of Bassett Furniture Industries (NASDAQ: BSET), as its stock has fallen 7.5% in the past three months. However, the fundamentals of the company look pretty decent, and long-term financial data is generally aligned with future movements in market prices. In this article, we have decided to focus on the ROE of Bassett Furniture Industries.

Return on equity or ROE is a key measure used to assess the efficiency with which the management of a company uses company capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.

How to calculate return on equity?

the formula for ROE is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Bassett Furniture Industries is:

12% = US $ 20 million ÷ US $ 159 million (based on the last twelve months up to August 2021).

The “return” is the profit of the last twelve months. One way to conceptualize this is that for every $ 1 of shareholder capital it has, the company has made $ 0.12 in profit.

What does ROE have to do with profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess the profits that the business is reinvesting or “withholding” for future growth, which then gives us an idea of ​​the growth potential of the business. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.

A side-by-side comparison of Bassett Furniture Industries profit growth and 12% ROE

For starters, Bassett Furniture Industries appears to have a respectable ROE. Regardless, the company’s ROE is still well below the industry average of 19%. In addition, Bassett Furniture Industries’ net income has declined 36% over the past five years. Keep in mind that the business has a high ROE. It’s just that the industry’s ROE is higher. Therefore, there might be other aspects that lead to lower income. For example, the company pays out a large portion of its profits as dividends or faces competitive pressures.

That being said, we compared the performance of Bassett Furniture Industries to that of the industry and we were concerned that although the company reduced its profits, the industry increased its profits at a rate of 21 % during the same period.

NasdaqGS: BSET Past Profit Growth December 30, 2021

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps him determine whether the stock is set for a bright or dark future. Is the BSET valued enough? This business intrinsic value infographic has everything you need to know.

Is Bassett Furniture Industries Efficiently Using Its Retained Earnings?

When we put together Bassett Furniture Industries’ low three-year median payout ratio of 1.8% (where it keeps 98% of its profits), calculated for the most recent three-year period, we are puzzled by the lack of growth. This should generally not be the case when a business keeps most of its profits. It seems that there could be other reasons for the lack in this regard. For example, the business could be in decline.

Additionally, Bassett Furniture Industries has paid dividends over a period of at least ten years, meaning the management of the company is committed to paying dividends even if it means little to no growth in earnings. After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to increase to 26% over the next three years. However, the company’s ROE is not expected to change much despite the expected higher payout ratio.

Conclusion

Overall, we think Bassett Furniture Industries certainly has some positive factors to consider. However, we are disappointed to see a lack of earnings growth despite moderate ROE and a high reinvestment rate. We believe that certain external factors could have a negative impact on the company. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

About Oscar L. Smith

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